Florida. TrainingPro. Ax5 Test Preparation: State Law and Regulation Definitions

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1 TrainingPro Florida Ax5 Test Preparation: State Law and Regulation Definitions Advanced Education Systems, LLC DBA TrainingPro ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher and the copyright holder. This publication is designed to present, as simply and accurately as possible, general information on the subject. It should be noted that the information presented is not all-inclusive. Products, programs and guidelines change due to rapid changes in the industry. This publication should not be used as a substitute for referring to appropriate experts and is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other personalized professional service. If legal or other expert assistance is required, the services of a competent professional should be sought.

2 Florida State Component State Law and Regulation Definitions (15%) In order to identify the individuals, businesses, and transactions that are subject to the provisions of a lending law, it is critical to understand the definitions that the law gives to the regulated individuals and entities and to the types of transactions that they conduct. This section will review important definitions under several areas of Florida law, including Chapter 494 of the Florida Statutes and FAC Rules 69V Florida Loan Originator and Mortgage Broker Act (Title XXXIII, Chapter 494) Chapter 494 (Parts 1-3) is Florida s licensing law for mortgage lending institutions that are not traditional depository and lending institutions such as banks, savings and loans, and credit unions. Part 1 of Chapter 494 covers general provisions as they apply to mortgage professionals. Part 2 contains the Florida laws applicable to mortgage brokers and loan originators, and Part 3 of Chapter 494 relates to mortgage lenders. This law also regulates the individuals who work for these businesses as mortgage loan originators. The administrative rules as they apply to mortgage professionals can be found in the Florida Rules 69V F.A.C. The following definitions are drawn from and apply to the law: Borrower: a natural person obligated to repay a mortgage loan, including but not limited to a coborrower, co-signor, or guarantor (Fla. Stat. Ann (1)). Branch manager: the licensed loan originator in charge of and responsible for the operation of the branch office of a mortgage broker or mortgage lender (Fla. Stat. Ann (2)). Branch office: a location, other than a mortgage broker s or mortgage lender s principal place of business: The address of which appears on business cards, stationery, or advertising used by the licensee in connection with conducting business covered by Florida law At which the licensee s name, advertising or promotional materials, or signage suggests that mortgage loans are originated, negotiated, funded, or serviced At which mortgage loans are originated, negotiated, funded, or serviced by a licensee (Fla. Stat. Ann (3)) Commission: the Financial Services Commission (Fla. Stat. Ann (4)). Contract loan processor: an individual licensed under Chapter 494 as a loan originator and who works for a mortgage broker or mortgage lender as an independent contractor engaged only in loan processing (Fla. Stat. Ann (5)). Florida State Component v2.1 1

3 Control person: an individual, partnership, corporation, trust, or other organization that possesses the power, directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract, or otherwise. The term includes, but is not limited to: A company s executive officers, including the president, chief executive officer, chief financial officer, chief operations officer, chief legal officer, chief compliance officer, director, and other individuals having similar status or functions For a corporation, each shareholder that, directly or indirectly, owns 10% or more, or that has the power to vote 10% or more, of a class of voting securities, unless the applicant is a publicly-traded company For a partnership, all general partners and limited or special partners that have contributed 10% or more or that have the right to receive, upon dissolution, 10% or more of the partnership s capital For a trust, each trustee For a limited liability company, all elected managers and those members that have contributed 10% or more or that have the right to receive, upon dissolution, 10% or more of the partnership s capital Principal loan originators (Fla. Stat. Ann (6)) Credit report: any written, oral, or other information obtained from a consumer reporting agency as described under the federal Fair Credit Reporting Act and which bears on an individual s creditworthiness, credit standing, or credit capacity. Credit score alone is not considered a credit report (Fla. Stat. Ann (7)). Depository institution: any bank or savings association, including any credit union (Fla. Stat. Ann (9); Federal Deposit Insurance Act 3(c)). Financial audit report: a report prepared in connection with a financial audit that is conducted in accordance with generally accepted auditing standards prescribed by the American Institute of Certified Public Accountants by a certified public accountant licensed to do business in the United States, and which must include: Financial statements, including notes related to the financial statements and required supplementary information, prepared in conformity with United States generally accepted accounting principles An expression of opinion regarding whether the financial statements are presented in conformity with United States generally accepted accounting principles, or an assertion to the effect that such an opinion cannot be expressed and the reasons (Fla. Stat. Ann (10)) In-house loan processor: an individual who is an employee of a mortgage broker or a mortgage lender and who engages only in loan processing (Fla. Stat. Ann (11)). Florida State Component v2.1 2

4 Institutional investor: a depository institution, real estate investment trust, insurance company, real estate company, accredited investor as defined in 17 C.F.R et seq., mortgage broker or mortgage lender licensed under the law, or other business entity that invests in mortgage loans, including a secondary mortgage market institution including, without limitation, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Government National Mortgage Association, conduits, investment bankers, and any subsidiary of such entities (Fla. Stat. Ann (13)). Loan commitment (Commitment): a statement by the lender setting forth the terms and conditions upon which the lender is willing to make a particular mortgage loan to a particular borrower (Fla. Stat. Ann (14)). Loan modification: a modification to an existing loan. This term does not include a refinancing transaction (Fla. Stat. Ann (15)). Loan origination fee: the total compensation from any source received by a mortgage broker acting as a loan originator. Any payment for processing mortgage loan applications must be included in the fee and must be paid to the mortgage broker (Fla. Stat. Ann (16)). Loan originator: an individual who, directly or indirectly, solicits a mortgage loan, accepts a mortgage loan application, negotiates the terms or conditions of a new or existing mortgage loan, negotiates the sale of an existing mortgage loan to a noninstitutional investor, or offers to do any of these in exchange for compensation or gain. This term includes an individual who is required to be licensed as a loan originator under the federal SAFE Mortgage Licensing Act of It does not include an employee of a mortgage broker or lender whose duties are limited to physically handling a completed application form or transmitting a completed application to a lender on behalf of a prospective borrower (Fla. Stat. Ann (17)). Loan processing: receiving, collecting, distributing, and analyzing information common for the processing of a mortgage loan. Also includes communicating with a consumer to obtain information necessary for processing a mortgage loan, if the communication does not include offering, negotiating, or counseling consumers about residential mortgage loan rates or terms (Fla. Stat. Ann (18)). Lock-in agreement: an agreement whereby the lender guarantees for a specified number of days, or until a specified date, the availability of a specified rate of interest or specified formula by which the rate of interest will be determined or specific number of discount points will be given, if the loan is approved and closed within the stated period of time (Fla. Stat. Ann (19)). Making a mortgage loan: closing a mortgage loan in a person s name, advancing funds, offering to advance funds, or making a commitment to advance funds to an applicant for a mortgage loan (Fla. Stat. Ann (20)). Florida State Component v2.1 3

5 Material change: a change that would be important to a reasonable borrower in making a borrowing decision, and includes a change in the interest rate previously offered to a borrower, a change in the type of loan offered to a borrower, or a change in fees to be charged to a borrower resulting in total fees greater than $100 (Fla. Stat. Ann (21)). Mortgage broker: a person conducting loan originator activities through one or more licensed loan originators employed by the mortgage broker or as independent contractors to the mortgage broker (Fla. Stat. Ann (22)). Mortgage lender: a person making a mortgage loan or servicing a mortgage loan for others, or, for compensation or gain, directly or indirectly selling or offering to sell a mortgage loan to a noninstitutional investor (Fla. Stat. Ann (23)). Mortgage loan: any of the following: A residential loan, primarily for personal, family, or household use, that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling, or for the purchase of residential real estate upon which a dwelling is to be constructed A loan on commercial real property, if the borrower is an individual or the lender is a noninstitutional investor A loan on improved real property consisting of five or more dwelling units, if the borrower is an individual or the lender is a noninstitutional investor (Fla. Stat. Ann (24)) Mortgage loan application: the submission of a borrower s financial information in anticipation of a credit decision, which includes the borrower s name, the borrower s monthly income, the borrower s social security number to obtain a credit report, the property address, an estimate of the value of the property, the mortgage loan amount sought, and any other information deemed necessary by the loan originator. An application may be in writing or electronically submitted, including a written record of an oral application (Fla. Stat. Ann (25)). Net worth: the total assets minus total liabilities pursuant to generally accepted accounting principles (Fla. Stat. Ann (26)). Principal loan originator: the licensed loan originator in charge of and responsible for the operation of a mortgage lender or mortgage broker, including all of the activities of the mortgage lender s or mortgage broker s loan originators, in-house loan processors, and branch managers, whether employees or independent contractors (Fla. Stat. Ann (29)). Principal place of business: a mortgage broker s or mortgage lender s primary business office, the street address, or physical location that is designated on the application for licensure or any amendment to such application (Fla. Stat. Ann (30)). Florida State Component v2.1 4

6 Registered loan originator: a loan originator who is employed by a depository institution, by a subsidiary that is owned and controlled by a depository institution and regulated by a federal banking agency, or by an institution regulated by the Farm Credit Administration, and who is registered with and maintains a unique identifier through the NMLS (Fla. Stat. Ann (31)). Registry: the Nationwide Mortgage Licensing System and Registry (NMLS), the mortgage licensing system developed and maintained by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators for the licensing and registration of loan originators (Fla. Stat. Ann (32)). Relative: any of the following, whether by full or half blood or by adoption: A person s spouse, father, mother, children, brothers, and sister The father, mother, brothers, and sisters of the person s spouse The spouses of the person s children, brothers, or sisters (Fla. Stat. Ann (33)) Servicing endorsement: authorizing a mortgage lender to service a loan for more than four months (Fla. Stat. Ann (34)). Servicing a mortgage loan: to receive, cause to be received, or transferred for another, the installment payments of principal, interest, or other payments pursuant to a mortgage loan (Fla. Stat. Ann (35)). Ultimate equitable owner: an individual who, directly or indirectly, owns or controls an ownership interest in a corporation, a foreign corporation, an alien business organization, or any other form of business organization, regardless of whether the individual owns or controls such interest through one or more individuals or one or more proxies, powers of attorney, nominees, corporations, associations, partnerships, trusts, joint stock companies, or other entities or devices, or any combination thereof (Fla. Stat. Ann (37)). Definitions for Terms Found on Licensing Forms As discussed in the course section on License Law and Regulation, license applicants are required to submit applications through the National Mortgage Licensing System using forms known as the MU forms. In order to ensure accurate completion of these forms, it is important to understand the meanings of the following terms: Affiliate: When the Administrator considers an application for a license, the backgrounds of any affiliates of the applicant are also subject to review. The failure to disclose affiliates and the failure to provide accurate information regarding their financial background and any action taken against them in criminal, regulatory, and civil action will result in the denial of a license. Florida State Component v2.1 5

7 The term affiliate includes: Any entity that directly controls or is controlled by the license applicant or licensee Any entity controlled by a trust whose shareholders control the licensee or a company that owns the licensee either directly or indirectly through a trust or otherwise Any company, including a real estate investment trust, that is in a contractual relationship with the licensee or license applicant, and any of its affiliates or subsidiaries Ultimate Equitable Owner: A person who, directly or indirectly, owns or controls an ownership interest in a corporation or other business organization, regardless of whether the ownership interest is owned or controlled through proxies, powers of attorney, corporations, partnerships, or other legal arrangements. Individuals protect themselves from personal liability with the formation of corporations and limited liability partnerships and companies. The broad MU Form definitions of affiliate and ultimate equitable owner are intended to encompass all of these business organizations to ensure that all those who impact the decision-making for a licensee are accountable. Other State Law and Regulation Definitions In addition to Chapter 494 and the applicable Florida Administrative Rules, mortgage professionals must be aware of other state and federal statutes applicable to the mortgage industry. For example, the Administrative Procedure Act governs how the Office can create administrative rules and the enforcement of those rules, including hearings, agency review, and circuit court hearings on matters. This Act is the administrative how-to manual for all the administrative tasks handled by the Office (Fla. Stat. Title X, Chapter 120). Definitions under the Uniform Commercial Code This section of Florida law pertains to negotiable instruments, which are defined as an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it meets all of the following: Is payable to bearer or to order at the time that it is issued or first comes into possession of the holder Is payable on demand or at a definite time, and Does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to payment of money. The promise or order may contain: o An undertaking or power to give, maintain, or protect collateral to secure payment o An authorization or power to the holder to confess judgment, realize on, or dispose of collateral, or o A waiver of the benefit of any law intended for the advantage or protection of an obligor (Fla. Stat. Ann ) Florida State Component v2.1 6

8 Drawee: a person ordered in a draft to make payment (Fla. Stat. Ann (b)). Drawer: a person who signs or is identified in a draft as a person ordering payment (Fla. Stat. Ann (c)). Good faith: honesty in fact and the observance of reasonable commercial standards of fair dealing (Fla. Stat. Ann (d)). Florida state law provides that all conveyances, obligations conditioned or defeasible, bills of sale, or other written instruments conveying or selling real or personal property in order to secure the payment of money are considered to be mortgages. This is true whether the instrument is from the debtor to the creditor or from the debtor to a third party in trust for a creditor. These articles are subject to the same rules of foreclosure, regulations, restraints, and forms as prescribed to relate to mortgages. A mortgage will be held to a specific lien on property described therein, and will not be held as a conveyance of legal title or of right of possession (Fla. Stat. Ann ; ). A right of redemption upon sale under the law exists in favor of the person whose interest is sold. This right may be exercised in the same manner as is or may be provided for redemption of real property from sales under mortgages (Fla. Stat. Ann ). To learn more about the provisions of the Uniform Commercial Code, the relevant provisions of the Florida Statutes may be found online. 1 The Equal Credit Opportunity Act (ECOA) Congress enacted the Equal Credit Opportunity Act (ECOA) in 1974 to eliminate discriminatory treatment of credit applicants. It applies to creditors, which the law defines as any person who, in the ordinary course of business, regularly participates in the decision of whether or not to extend credit. Further important definitions include: Discriminate: to discriminate against an applicant means to treat that person less favorably than other applicants (12 C.F.R (n)). Dwelling: a residential structure containing one to four units, whether or not the structure is attached to real property. This term includes individual condominiums, cooperative units, and mobile or manufactured homes (12 C.F.R (a)(2)). Person: this term includes individuals or natural persons and entities such as corporations, government agencies or divisions, trusts, estates, partnerships, cooperatives, or associations (12 C.F.R (x)). Prohibited basis: personal characteristics (race, color, religion, national origin, sex, marital status, or age), and facts (an applicant s income from public assistance or an applicant s exercise 1 Florida State Component v2.1 7

9 of a right under the Consumer Credit Protection Act) that a creditor is prohibited from using as a basis for making decisions regarding the extension of credit (12 C.F.R (z)). The Truth-in-Lending Act (TILA) The Truth-in-Lending Act (TILA) was enacted to ensure the clear, accurate disclosure of information to consumers in advertising, and in mortgage lending transactions. TILA regulates creditors, defining them as natural persons or business and financial organizations that do all of the following: Regularly extend consumer credit Make credit subject to a finance charge or make the credit payable under the terms of a written agreement that requires repayment in more than four installments Receive the initial payments on the debt that the borrower assumes in the lending transaction A person regularly extends consumer credit if: The credit is secured by a dwelling and is extended more than five times in the preceding calendar year The credit is secured by a dwelling and, in any 12-month period, the creditor originates more than one credit extension that is a high-cost mortgage regulated under HOEPA, or The credit is secured by a dwelling and, in any 12-month period, the creditor originates one or more high-cost mortgages regulated under HOEPA through a mortgage broker (12 C.F.R (a)(17)(v)) There are a number of terms used within the Truth-in-Lending Act that are important to understanding the law s requirements. The following definitions are intended as an introduction. Finance charge: the cost of credit expressed as a dollar amount Annual percentage rate (APR): the cost of credit expressed as a percentage Closed-end credit: credit that is extended in a lump sum at one time, such as a traditional mortgage loan Open-end credit: credit that may be accessed in a revolving manner, such as a credit card. Home Equity Lines of Credit (HELOCs) are a common example of open-end credit Creditor: an individual or entity, such as a lender, that extends closed- or open-end credit Home equity plans: loans structured as open-end credit. Home equity plans should not be confused with the general industry term home equity loan a home equity loan is generally a closed-end second mortgage or piggyback loan based on the equity that a borrower has in his or her home Truth-in-Lending (TIL) Disclosure Statement: the primary disclosure required by TILA for closed-end loans Florida State Component v2.1 8

10 Customer Handbook on Adjustable-Rate Mortgages (CHARM) Booklet: a disclosure booklet used to educate consumers on the risks associated with adjustable-rate mortgages Early ARM Disclosure: a type of Truth-in-Lending disclosure for variable/adjustablerate mortgages, covering the specifics for each type of loan program Trigger terms: terms used in advertising that trigger specific information required under the Truth-in-Lending Act TILA regulates transactions that involve the extension of credit to individuals for personal, family, or household purposes. Under TILA, mortgages are a form of credit and are subject to regulation when the following conditions are true: The borrower s dwelling secures the mortgage debt The homeowner uses the proceeds of the loan for personal, family, or household purposes The credit is offered to consumers The offer or extension of credit is made regularly The credit includes a finance charge or a written agreement stating that the loan may be repaid in more than four installments The Truth-in-Lending Act does not apply to: Business, agricultural, or organizational credit Credit in excess of an annually-adjusted threshold amount. The threshold for 2013 was $53,000 o This threshold does not apply in transactions secured by real or personal property used or expected to be used as the consumer s principal dwelling Public utility credit Credit extended by a broker registered with the Securities Commission Exchange or the Commodity Futures Trading Commission Home fuel budget plans Student loans Employment-sponsored retirement plans The loans that are subject to TILA are subject to two sets of rules: those for open-end credit and those for closed-end credit. While differences in Regulation Z s rules for closed-end and openend credit may be minor at times, it is important to note the distinction in order to ensure full compliance with the law. In a closed-end transaction, a creditor disburses all of the funds at closing and demands repayment within a specified period of time. During the repayment period, borrowers cannot request an increase in the principal amount of the loan. A mortgage refinancing is an example of a closed-end loan that is subject to the provisions of TILA and Regulation Z. Florida State Component v2.1 9

11 The primary characteristic of an open-end loan is that both borrower and creditor anticipate repeat transactions. In an open-end transaction, a creditor gives the borrower a limit on the amount of funds that he or she can withdraw, and the borrower has the option of requesting a cash advance in any amount; the borrower may also request an increase in the amount of credit available. Payments depend on the interest due on the amount withdrawn. The Home Ownership and Equity Protection Act (HOEPA) The Home Ownership and Equity Protection Act (HOEPA) was enacted in 1994 in response to the growing use of abusive mortgage lending terms and practices in the subprime market. It added provisions to the Truth-in-Lending Act to require mortgage loan originators of loans covered by HOEPA to avoid specific terms and practices, and to require them to provide borrowers with specific disclosures. Effective in 2014, the applicability of HOEPA was extended to cover a wider variety of mortgage loans. HOEPA applies to purchase money mortgages, closed-end home equity loans, open-end credit plans (HELOCs), and refinances that are secured by a consumer s principal dwelling. It does not apply to reverse mortgages, bridge loans for the initial construction of a dwelling, loans originated and directly financed by a housing finance agency, or loans originated under the USDA s Rural Development Section 502 Direct Loan Program. The most important definition to understand under HOEPA is its definition of a high-cost home loan. High-cost home loan: a home loan that exceeds either APR, points and fees, or prepayment penalty thresholds prescribed by federal law under 15 U.S.C. 1602(aa). These thresholds are: Annual percentage rate (APR) in excess of the average prime offer rate for a comparable transaction by: o 6.5 percentage points, for a first lien mortgage loan o 8.5 percentage points, for a first lien mortgage loan where the dwelling is personal property and the loan is for less than $50,000 o 8.5 percentage points, for junior (subordinate) lien transactions Points and fees for the transaction exceed: o 5% of the total transaction amount, for a transaction of $20,000 or more o The lesser of 8% of the total transaction amount or $1,000, for a transaction of less than $20,000 Prepayment penalties for the transaction: o Are imposed more than 36 months after consummation or account opening, or o Exceed, in aggregate, 2% of the amount prepaid (12 C.F.R (a)(1)(i-iii)) Florida State Component v2.1 10

12 For the purposes of the above thresholds, the term points and fees includes: All items included in the finance charge All compensation paid by a consumer or a creditor to a mortgage loan originator All bona fide, reasonable real estate-related fees Premiums paid at or prior to consummation for optional credit insurance products Prepayment penalties HOEPA excludes the following from points and fees: Interest rate or time-price differential Guaranty through a federal or state program to protect the creditor from default Private guaranty or insurance to protect the creditor from default Bona fide third-party charges not retained by the creditor Up to two bona fide discount points, if the interest rate without a discount does not exceed the APOR by more than 1% Up to one bona fide discount point, if the interest rate without a discount does not exceed the APOR by more than 2% It is important to note that in some cases, there may be discrepancies between provisions of state and federal law. Where this is the case, the stricter standard will prevail. Florida State Component v2.1 11